What's Next For The Daily Deal Business Model?

Despite their recent woes, "daily deal" companies Groupon and Living Social can be profitable, says analyst Arvind Bhatia.

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Originally published on December 4, 2012 7:22 am

Are the days of "daily deal" coupons about to expire? Shares of email coupon company Groupon are down nearly 80 percent since going public last year. And its smaller rival, Living Social, plans to lay off as many as 400 employees, after reporting a net loss of more than $560 million in the third quarter.

Those struggles have raised questions about the future of the daily deal strategy, and whether a company like Groupon can stay in business.

"It's ... an evolution of the company that's happening," says Arvind Bhatia, managing director of equity research for the investment firm Sterne Agee, in an interview with NPR's David Greene. "They have a decent balance sheet," Bhatia says of Groupon. "As long as they continue to generate profitability, I think the business can survive." Stern Agee trades in Groupon shares and has an investment banking relationship with Groupon.

Interview Highlights:

On the coupon business model

"I think fundamentally, the model can work. But it needs scale. Keep in mind that Groupon was born out of the recession ... at a time when people wanted to see deals. So they were right in the sweet spot of what people really wanted. And they've grown really fast.

"But ... the daily deal business seems to be peaking. And in some ways, Groupon is a victim of its own success. It's hard for them to continue to grow the daily deal business the way they did before."

On the need for scale

"Both Living Social and Groupon — Groupon, in particular — have spent tons and tons of money in acquiring these customers. They have something like 160 million people whose email list that they have. That is what is attractive to merchants. So, you need scale to succeed."

On complaints about deals

"The deals that merchants offer are deeply discounted deals. And those are meant to be deals that bring customers in. And hopefully, customers like the product and keep coming back.

"Sometimes what happens is, the merchants that are using this product maybe don't know how to use it appropriately. And maybe their service isn't good enough — and they were hoping this would be this one last desperate move to get customers in before they go out of business. So, it depends on the merchant itself."

On the evolving "daily deal" business

"In the beginning, it was all about, let's acquire customers at all costs. Now, particularly for Groupon, it's OK, you've got the customers. Now show us how you can make money with this business model.

"So one thing they have to do is slow down on their spending. And they're doing exactly that."

On moving past email

"What they've talked about is tapping into, perhaps, search engines like Google and Bing to attract more customers. And that's a pretty significant move. Keep in mind that 25 percent of all searches ... are for local products.

"But right now, they're driving very little business from these search engines. So that's an opportunity for them to now go after customers that are looking for deals in general, not just through the emails."

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